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Dynamic runs and circuit breakers: an experiment

Published online by Cambridge University Press:  14 March 2025

Jacopo Magnani  and
David Munro
Jacopo Magnani*
Affiliation:
Division of Social Science, New York University Abu Dhabi, Abu Dhabi, United Arab Emirates
David Munro*
Affiliation:
Department of Economics, Middlebury College, 14 Old Chapel Rd., Warner Hall 505, 05753 Middlebury, VT, USA
*
[email protected]
[email protected]
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Abstract

Although now widespread in financial markets, circuit breakers remain controversial among researchers and professional investors. We formalize the popular argument that circuit breakers provide a “cooling-off” period for investors during market runs and we test it in the laboratory. Our experiment reproduces a market where investors fear future liquidity shocks but receive news about the true state over time. Notably, we find that when information quality is poor circuit breakers can have perverse effects on trading behavior. However, when information quality is high, circuit breakers can improve welfare by providing agents with time to learn about the true state, when private incentives to wait for more information are insufficient.

Keywords

Circuit breakersMarket runsExperiment

JEL classification

G01: Financial Crises G18: Government Policy and Regulation
Type
Original Paper
Information
Experimental Economics , Volume 23 , Issue 1 , March 2020 , pp. 127 - 153
Copyright
Copyright © 2019 Economic Science Association

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Footnotes

Electronic supplementary material The online version of this article (https://doi.org/10.1007/s10683-019-09602-5) contains supplementary material, which is available to authorized users.

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